Apr 2 - 8, 20

Pak rupee went historically low against the U.S. dollar in the open market on Tuesday last when it was traded 91.3 per dollar. Over a last couple of years, the rupee continues to lose its value to the dollar. From 87.7 in October last year, the rupee exchange rate against the dollar reached to the current level only in two quarters, to have touched minimal mark of 82.5 on November 10 and maximal point of 91.6 on March 25 during this period. The rupee lost 5.8 per cent of its value against the greenback during January 01 to March 2, 2012.

In the present international financial system dominated by the U.S. dollar, exchange rate or local currency-dollar parity depends on the strength of an external economy i.e. exports/imports. Pakistan settles payments in dollars in the international market, making prices of exporting and importing products dependent on dollar-rupee parity. If rupee depreciates, import becomes dearer but exporters get benefits. On the other hand, when the rupee gains traction, exports are likely to take impact.

Bankers have said on record that rupee depreciation discourages imports and somehow increases competitiveness of Pakistani products over regional competitors in the international market.

It is worthwhile to note that regional economies have one-upped in intervening the foreign currency market. Pak rupee lost six per cent between July 2011 and February 2012 while Indian and Sri Lankan rupees shed 9.3 and 11.2 per cent respectively during this period.

In addition, Pak rupee is travelling on the downward trajectory because of widening trade deficit and fragile foreign reserve position. Pakistan's economy is not performing quite well.

Repayment of $399 million in lieu of IMF's loan brought reserves down to $16.4 billion in February. However, the impact on currency market was not perceptible. International Monetary Fund (IMF) sanctioned $11.4 billion loan to Pakistan to avert its balance of payment crisis in 2008. The standby arrangement (SBA) program was cancelled on noncompliance of Pakistan with the IMF's conditionalities before providing it with $7.9 billion.

The pressures on foreign reserves continue to swell since the country has to repay approximately $900 million by June-end. The repayment is being made in special drawing rights (SDR) calculated at the current exchange rate.

External flows are very vital in the current scenario to prop up the reserves. Islamabad is looking towards the estranged U.S. that it releases $800 million of total two billion dollars pledged in military assistance for this fiscal year. Ever-increasing defence spending especially in the wake of the war on terror is one of the prime factors of keeping revenue-expenditures gap wide.

IMF is a resourceful outlet, but it is also not satisfied with the economic indicators of Pakistan despite latter's intention of renewing cancelled loan programme or getting new loan. The Washington-based institution stopped the SBA because of undesirably high fiscal deficit and ineffective tax reforms in the country. On the other hand, it is painting bleak picture of the economy, saying in its latest report the economy is highly vulnerable.

"Two major floods, difficulties in implementing key policy reforms, and a more challenging global environment have combined to limit growth and employment creation and made the economy highly vulnerable, with few buffers to absorb shocks," said the IMF report.

The current account deficit in July-February fiscal 2011/12 stood at $2.9 billion in a visible contrast to $194 million in the comparable period in fiscal 2010/11. The deficit in February also shot to $260 million as compared to $98 million in the same month last year, though it slid from $364 million in January 2012.

July-February trade deficit increased 41 per cent to $14.6 billion from $10.3 billion in the comparable period. Exports declined marginally 0.5 per cent to $15.19 billion in the first eight months of current fiscal 2011/12. Imports, on the other hand, climbed considerably to $29.7 billion versus $25.59 billion, depicting an increase of 16.3 per cent.

Oil and food are the two items accounting for 40 to 45 per cent of total imports into Pakistan. Oil import rose 38.3 per cent to $9.9 billion in July-Feb, though food import was down 2.4 per cent to $3.4 billion perhaps owing to fall in palm oil prices in the international market.

"Import payments are likely to increase because of higher global oil prices and ... we may see the rupee weaken further in the coming days," Reuters reported a bank dealer as saying.

Half of the economy of Pakistan is not documented and thus out of the tax net. Besides, instead of coming down the tax gap is widening very quickly. According to a World Bank's report, tax gap in the country widened sharply to 80 per cent from 70 per cent in 2008.

Tax evasion is common with a significant portion of taxable sectors untaxed. The unproductive tax machinery relies primarily on regressive taxes to ring up taxes, imposing burden on the consumers. Pakistan's tax to GDP ratio is quite low in the region. Corruption-distraught India collects taxes annually equal to 18 per cent of its GDP. Analysts said actual gross development products (GDP) size in Pakistan is somewhere around $300 billion instead of $175 to $200 billion.

Analysts are foreseeing further decline in Pak rupee value per dollar throughout the year, basing their arguments on IMF's debt repayment obligations that eat into the dollars stock as well as political instability in Pakistan.

"The currency was quite stable before the airstrike and tension with the U.S.," Malik Bostan, a spokesman for the Forex Dealers Association told Bloomberg. "The government will have to limit its decline through the central bank, or it will keep falling. It will accelerate inflation and will hurt the already-dying industry," he advised.

Revival of international demand can also put an end to competition among regional countries of keeping value of local currency down in a bid to rack up sales in the wake of weak consumer confidence.